In its worst day since Britain voted to leave the EU, Deutsche Bank shares fell 8.5 per cent to €11.99 on Friday, as investors fretted about the crippling impact of a $14 billion (£10.5 billion) possible fine over mis-selling mortgage securities in the US.
The penalty aims to settle the U.S. Justice Department’s allegations tied to mortgage-backed securities, dating back to 2005, about the way the bank selected mortgages, packaged them into bonds and sold on to investors.
German Chancellor Angela Merkel declined to comment on the decision. “I think it’s wise not to comment on this news from my side,” Merkel said when asked by a Reuters correspondent.
However, the finance ministry said earlier on Friday: “The German government assumes that a fair result will be achieved on the basis of equal treatment.”
Other European banks affected
Deutsche Bank has been quick to describe the fine as an “opening position” and made clear it has no intention of agreeing to a fine at this level, which was first reported by the Wall Street Journal.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the lender said. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”
While Deutsche is the first European bank to have started negotiations to settle civil claims over dealings in shoddy mortgages, the bank’s woes are having a knock-on effect for other large European banks that are also waiting to agree settlements for similar allegations.
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Barclays Plc and the Swiss banks UBS Group and Credit Suisse are among others waiting for settlement talks to be concluded. Their shares also fell 2.8 percent, 2.9 percent and 5.2 percent respectively on Friday. The news dragged down also on shares of Royal Bank of Scotland which traded down 4.5 percent.
Can Deutsche afford the bill?
Many financial institutions were investigated about the issuing and underwriting of residential mortgage-backed securities in the run-up to the 2008 financial crisis.
The US banks that have reached settlements for allegedly mis-selling mortgage securities include Bank of America which paid $17 billion in 2014. In a similar case, rival Goldman Sachs agreed in April to pay $5.06 billion to settle claims. The settlement included an admission of wrongdoing.
Claims filed by individuals, companies and regulators against the banks accused them of misleading investors about the quality of their loans. While promoted as relatively safe, the residential mortgage-backed securities (RMBS) that were packaged into bonds were unlikely to be able to repay their loans. The poor quality of the loans led to huge losses for investors and a slew of foreclosures, kicking off the recession that began in late 2007 as the housing market collapsed.
Although the U.S. mortgage investigation is gaining most attention, Germany’s largest bank is battling against many other probes relating to activities in Russia and trading issues such as foreign-currency rate manipulation and precious metals trades.
Since he took over last year, John Cryan, Deutsche’s chief executive, has said he aims to settle major outstanding legal issues as soon as possible as part of his wider overhaul.
Deutsche Bank had 5.5 billion euros set aside for litigation costs, with a further €1.7 billion held as unreserved contingent litigation liabilities, but it does not spell out exactly what that sum is for.
Here’s how Deutsche Bank shares looked just after the news: